Here we look at the reputational risks posed by today’s social media-focused world, and the steps Compliance teams can take to mitigate them.
News moves fast in the digital world
The Aon report is based on a study by Pentland Analytics and Aon, which examined 125 reputational crises over the past decade and what happened to their shareholder value over the following year.
The report notes that while technological innovations have ‘provided tremendous opportunities for businesses…The rise of social media and online review sites mean that bad news travels far and fast’.
News spreads faster than ever before – whether it’s positive or negative, or even true or false. A misconception about a firm, repeated many times online, quickly assumes the status of ‘fact’. Companies can struggle to correct any misinformation without looking defensive.
With a reputational crisis having the potential to significantly impact a company’s financial future, avoiding such crises is vital. And because it’s potentially so easy to destroy brand reputation, it’s worth exploring all the avenues to prevent it happening.
The report cites a direct correlation between a hit to a company’s reputation and its shareholder value – its ability to deliver increased dividends and capital gains for its equity owners.
Companies paying increasing attention to reputational risk
Managing reputation-related risk is a growing preoccupation for boards. Businesses worldwide see reputation damage – amplified by social media – as their top risk management concern, according to Aon’s Global Risk Management Survey.
Communications have changed, with social media both amplifying any mistakes firms make and creating an expectation of increasingly rapid response times, whether around correcting errors, responding to issues or replying to customers.
This is something we’ve explored before, in our blog looking at how to minimise risk in your social media strategy.
Reputation is valuable
The report examines the ‘reputation premium’ – the excess in value enjoyed by leading brands and based on the positive reputation they maintain. It cites a survey by branding agency Interbrand, which showed that most of the world’s top ten brands enjoyed this ‘reputation premium’, which in some cases can be worth hundreds of billions of dollars.
Conversely, companies facing an adverse event – a cyber-attack, for instance, or major product recall – can also see significant changes in their value. On average, the report says, 5% of shareholder value is lost over the year following the event.
Reputational winners and losers
After a crisis, the Aon study shows, firms fall into one of two camps – they are either a winner or a loser. It says that ‘Winners tend to outperform investors’ pre-crisis expectation and actually gain shareholder value in the year following a reputational crisis, while losers experience a value decline that exceeds the average’.
Social media plays a role here. The Aon/Pentland analysis shows that winners have done better in the time of social media than they did before its advent – in 2018, companies that emerged successfully from reputational crises gained 20% in value, compared to a 10% increase in 2000, before social media really existed.
However, companies that lost value lost more – nearly 30%, compared to 15% in 2000.
The way companies respond to the crises they face makes the crucial difference here. Managerial capabilities, and the ability to handle a crisis, are placed front and centre by a highly public crisis. Firms that respond effectively, can actually see a positive impact on the way they are perceived.
Some key characteristics are common to the way companies successfully deal with a crisis:
Respond immediately. This shows that you are taking decisive action and providing honest information to the public. It also puts you in charge of the narrative around the event – rather than leaving a vacuum, on social media and elsewhere, that others will be only too happy to fill.
Know the facts. You need to be informed about the issue and its potential impact, on the firm and wider world.
Be decisive. Take action to address the issue – stop production of a flawed product, or announce remedial action to tackle a data breach.
Be open. Show that you are providing full, honest information on the crisis and what you are doing to address it. Keep the public apprised of progress.
Respond globally. Having a consistent response and message worldwide has a more positive impact than taking a piecemeal approach.
Make amends. Companies are expected not just to admit but to make up for their mistakes. The form this takes will vary according to the initial issue, but may, for instance, mean adapting future products, increasing consumer protections, providing compensation, or putting in place environmental protection measures.
An added complication for regulated firms
If you are regulated by the FCA, reputational risk is, of course, not the only risk you face from social media. The financial regulator has strict rules governing firms’ use of Twitter, Linkedin, Facebook and other social media platforms.
For example, the FCA dictates that financial promotions should be fair, clear and not misleading; this applies to promotions via social media in the same way it does to those via other channels. Tweets and posts also need the same Compliance team sign off as any other materials, and you need to keep FCA-compliant records of the posts you share.
All of this adds another layer of risk management to your social media strategy, over and above the wider reputational risks faced by all organisations.
There’s some good advice in the Aon report about managing reputational risk online – you can read the full report here.
You can also read more about how regulated firms can develop a compliant, compelling social media strategy in our ‘10 best practices for compliant social media’. You can download a free copy of that here.
Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.